All posts tagged UK banks

Andrew Bailey in a news conference at the Bank of England in London on June 26.

I’ve been trying all week to get clear answers to a series of questions about the U.K. Prudential Regulatory Authority’s surprise decision to impose a 3% leverage ratio requirement on British banks, announced last week. So far the answers I’ve had have been at best incomplete and at worst have only further clouded the picture.

To many people, these questions may seem rather technical and it may be that I’m being a bit obsessive. After all, the BOE has said the issue of the leverage ratio will be cleared up by the end of July and there is nothing in the share price reaction of Barclays, the one listed bank affected, to suggest the market is concerned about this issue.

Even so, I think this episode raises profoundly important questions that must not be swept under the carpet. In parliament this week, Sir Mervyn King, the outgoing Governor of the Bank of England, made the astonishing accusation that at least one person in either 10 Downing Street or the Treasury had tried to put improper pressure on an independent regulator.

At last, sense seems to be entering the U.K. banking reform debate. I argued here two weeks ago that Project Merlin missed an important trick not addressing the U.K. mortgage famine, which is partly due to the chronic funding challenges faced by British banks. I also argued yesterday that the high cost and scarcity of U.K. bank lending was one of the biggest risks to the recovery and the reason why the Bank of England is right to be cautious about raising interest rates. So I view reports that George Osborne is considering ways to loosen the U.K.’s ultra-tough, gold-plated liquidity rules is the first really positive news on the regulatory reform debate for years – not just for bank investors but for anyone with a stake in the performance of the U.K. economy. If it is a sign the tide is finally turning on the fundamentalists at the Bank of England and Financial Services Authority who, egged on by the crude bank-bashing U.K. press, have so far driven the reform debate, then it cannot come soon enough.

Details of Project Merlin – the grand bargain between the U.K. banks and the government designed to draw a line under years of banker-bashing – will be released later today. If anyone still had any illusions this will be anything other than a PR stunt, then George Osborne’s decision to announce a new £800 million tax grab on radio yesterday morning will have disabused them. The Chancellor clearly knows exactly how toothless this bargain will appear to the bank-bashers so decided to get his retaliation in first.

My beef with Project Merlin is that it focused on the wrong target. In my Agenda column for the European edition of the WSJ today, I argue that if there is a case for government interference in any aspect of bank lending, then it would have been far better targeted at the mortgage market, where there is a real problem, rather than business lending, where there isn’t.

Understandably, there’s feverish speculation in the City over what Sir John Vickers, the chairman of the U.K. Independent Commission on Banking, will say in a speech he’s due to make this weekend. The Commission’s report this Autumn will be one of the biggest events of the U.K. financial year. Sir John will be making his first public comments since the launch of the Commission last year.

The Financial Times has splashed today with a story claiming that he will make clear the Commission’s plans to impose structural reforms on the U.K. banks. But the FT’s story does not tally with my understanding of the situation.

Where the FT is undoubtedly right is to say that the Commission is determined to tackle head-on the “too big to fail” issue. The Commission believes it will have failed if its report does not close down the political debate over the banking industry once and for all, according to people familiar with its thinking. That will come as a blow to those who had hoped it might downplay the structural reform part of its remit and focus more on competition issues.

The Commission’s ambition also has implications for the likely shape of its final report. Neither the government or banking industry should delude themselves that the Commission will meekly come up with a range of policy options and invite the Treasury to take its pick. I’m told that the Commission’s clear aim at this stage is to come up with a single set of recommendations and invite the government to take it or leave it – making it far harder for Chancellor George Osborne to kick the issue back into the long grass even if the results are politically unpalatable. This report really will decide the fate of U.K. banks.

But I think the FT is overstating the situation when it says the Commission has already decided to address the too big to fail problem via structural remedies, whether full break-up of banks or subsidiarisation